Ready, Set, Go Go Go!

Ready, set, go go go!  Stocks started 2020 with a sprint right out of the gate on raw optimism and a little help from the Chinese Central Bank.  Monetary easing started the rally in Asia and Europe and spread to the US for another record session.

 

N O T E W O R Y H Y

 

• The heat is on.  Last night, WHILE YOU SLEPT, the US launched a drone strike in Iraq, killing Iran’s top military leader.  The move is likely to have been in response to the recent militia attack on the US embassy in Iraq, thought to be at the directive of Iran. President Trump tweeted an American flag immediately after.  Tensions in the region have been high and Iran has been escalating hostility.  You may recall last year’s attacks on both tanker ships and oil fields in the region.  This latest move elevates tension and will likely draw a response.  What this means for investments is volatility. Crude oil traded up immediately after the incident was reported, rising almost +5%.  Crude at the time of this writing, is up by +4.1%, trading at 63.57.  Stock futures traded down in response to the attack with S&P500 futures down by around -1.4%.  The VIX Index, which measures volatility in the S&P500, rose to 15.79 after closing yesterday at 12.47.  It is too early to tell how the moves will affect the regular trading session, but we can expect lots of commentary from both sides as well as more rhetoric from members of congress. Traders will be turning on their screens in the next few hours and we will get a better handle on whether they will view this as a buying opportunity or a signal to wait and see.
• Easy money.  Yesterday’s epic move in stocks saw the largest first session gain since 2013, another landmark year. The move was largely ignited by the Chinese Central Bank’s overnight move, reported here yesterday morning.  The PBOC lowered the commercial banks’ reserve ratio by -50 basis points.  That means that lending banks will have to reserve less cash, freeing it up to be loaned out to businesses and individuals.  The move is expected to have freed up around $115 billion in funds to be injected into the Chinese economy.  Though the move was largely expected, it was welcome news to investors who are expecting the Chinese economy to grow by only around +6%  this year.  I italicized “only” in order to highlight the fact that while +6% growth for China may be undesirable, it is still quite respectable compared to most developed economies. US stocks traded up yesterday, led by the Technology and Industrial sectors, the two most vulnerable to the Chinese economy.  Advanced Micro Devices (AMD) and Apple were amongst the high flyers yesterday.  Apple being a big component of the S&P500, the Dow Jones Industrial Average, and the NASDAQ Composite, did its share in pulling those indexes to their first record high closes of the year.

 

THE MARKETS

 

Stocks started the decade with a bang yesterday, trading up on a Chinese stimulus package announced prior to yesterday’s open.  Semiconductors, Technology, and Industrials traded up while Utilities and Real Estate had a rough session.  Utilities and Real Estate are considered safer investments and become go-to sectors when investors are in a risk-off mood. Yesterday’s clear risk-on move saw funds move from defensive to growth sectors.  The S&P500 climbed by +0.84%, the Dow Jones Industrial Average jumped by +1.16%, the Russell 2000 slipped by -0.10%, and the NASDAQ Composite Index traded up by +1.33%.  Bonds traded up yesterday and 10-year treasury yields fell by -4 basis points to 1.87%.

 

NXT UP

 

– Construction Spending is expected to have grown by +0.4% compared to last month’s decline of -0.8%.

– ISM Manufacturing PMI is expected to come in at 49.0 up slightly from the last index reading of 48.1.

– The Fed will release the minutes from it last FOMC meeting and they will be carefully scrutinized for clues about not only the future direction of interest rates but also the Fed’s stance on Repo facilities and short term liquidity, which has emerged as a new hot topic.

– Richmond Fed President Thomas Barkin, Fed Governor Lael Brainard, San Francisco Fed President Mary Daly, Chicago Fed Chief Charles Evans, and Dallas Fed Head Robert Kaplan will all speak today.

– Next week we will get services PMI’s, Factory Orders, Durable Goods Orders, and the monthly employment numbers from the Bureau of Labor Statistics.  Check back on Monday for details.

 

Come up and see me

 

A brief reminder that I will be meeting with clients in our Boca Raton and Miami offices next Thursday and Friday and would love to meet with you.  Please reach out and set up some time.

 

daily chartbook 2020-01-03